As a consumer, downloading Flash has never been an issue for me, and it's usually a painless process to acquire. I never wanted MS to kill Flash, I just thought it was nice to have options.
For you it's never been an issue. For many people who lack the technical skills this community has, the situation is different. They may download and install Flash properly, and get to the content out there. But do they keep Flash updated properly to avoid the security implications it brings to the table? Are they even aware of the security problems? In most cases, no.
Situation 2 is where we're going to end up, and it sucks (imo) because we're still tethered to a language that was never designed for applications. Sure we are making changes (and I'll admit, I haven't looked deep into HTML 5 which I know has drastic changes), but at the end of the day we are still shoehorning in application-like behavior into something that was designed for presenting and navigating documents.
I definitely see your point, but the answer to the problem isn't to run off and go create more proprietary languages and plugins. Even if Apple hadn't come along with the iPad, some other company would have changed the face of computing with a similar device, and we already see computing changing on the really mobile side due to smart phones. The more proprietary languages people are tied to, the more they can't move to new computing platforms. If Apple was out of the picture, I'm sure Microsoft would have had no problem continuing on their path of proprietary technology while entering the era of these new computing platforms. In the particular case of Flash, Adobe never demonstrated Flash running on iOS at a sufficient quality level for such devices, so ultimately situation 2 is occurring due to the inactions by Adobe as much as the actions of Apple.
I've been waiting for YEARS for someone to come along and come up with a better way to write web apps than pushing HTML to limits. When Flash came out I REALLY thought that was going to be it, but Flash really didn't work out that way- as flashy as it was, it was never a good choice for line of business apps, and that is a huge driver of software that is written today. Once Silverlight 3 hit the shelves, we finally had a well designed product that could do the flashy stuff, but ALSO allowed the ability of writing really great line of business apps across the web. I actually regret that it came from Microsoft, because if it had been developed by someone else I think people would've given it a lot more credit.
What's stopping the industry from getting together and creating a new, proper, open standard for running applications on the internet? Why do we instead have a situation where Microsoft, Adobe, and to some extent Sun feel the need to own and control the technology? It took the iPads success to sound a wakeup call to these companies that they needed to start working harder, due to them watching their monopoly, or near monopolies start to erode.. Maybe from here, they will work towards ensuring HTML 6 or whatever follows does what it needs to, without being tied to just one company.
Business apps have been a main driver in the past, but I think thats only been due to the lack of focus on the consumer market. We are starting to see a new era where consumers are finally integrating more computing devices into their daily lives, and there is going to be more and more demand from the space for good applications, web or normal ones. Apple is doing well today because they saw this, and put proper focus on the consumer market first. Microsoft is still mostly focused on the enterprise and OEMs, and unless they change a bit more rapidly, they may see the end of their consumer rule over computing. Consumers will one day get so fed up of "the damn PC not working again" that they may just move entirely to a device like the iPad. $500 looks cheap compared to the cost of a PC, and repeated visits to the Geek Squad desk to clean up a machine due to a single web link. Once consumers aren't afraid of harming their machines, the app market will explode in the consumer space.